Archive for February, 2012

Fiduciary Responsibilities for Senior Managers and Boards: Intangible Assets…

February 28th, 2012. Published under Board oversight, Fiduciary Responsibility. No Comments.

 Michael D. Moberly    February 28, 2012

In Stone v. Ritter a Delaware court (2006) drew attention to board – director oversight (management, stewardship) of compliance programs and company assets.  In part, the court’s decision read…

 ’…ensuring the board is kept apprised of and receives accurate information in a timely manner that’s sufficient to allow it and senior management to reach informed judgments about the company’s business performance and compliance with the laws…’ 

A fiduciary responsibility to be kept apprised of and know what’s going on inside a company…now that’s a decision that goes to the very heart of today’s go fast, go hard, go global intangible asset driven businesses! 

Rebecca Walker suggests in her paper ’Board Oversight of a Compliance Program: The Implications of Stone v. Ritter’, this decision will come to be viewed (applied) less for its focus on board oversight of compliance programs per se, and more for bringing clarity to what actually constitutes ‘board oversight’ of a company’s assets, and by extension, its intangible assets.

This is a particularly pertinent message at a time when rising percentages, i.e., 65+% of most company’s value, sources of revenue, and building blocks for growth and sustainability evolve directly from intangible assets.  So, any declaration, judicial or otherwise, that this increasingly valuable asset class now imposes fiduciary responsibilities at the board and senior management levels respectively is very significant in my view!

Accommodating the spirit and intent of the Stone v Ritter decision, on the intangible asset side, is certainly achievable for companies.  The approach described here however, extends beyond the decision’s minimums. It is intended to position boards and senior management (c-suites) to recognize and ultimately demand relevant information including asset performance indicators, i.e., to identify and assess:

  • intangible assets’ stability, defensibility, and contributory value and the various contexts in which intangibles are in play,
  • strategies to prevent, counter, and/or mitigate risks, threats, and vulnerabilities to the assets which  must extend beyond conventional snap-shots-in-time audits or checklists to include a range of events and/or circumstances that could, if materialized, impair, erode, and/or undermine the assets’ contributory value, competitive – market space advantages.
  • techniques for structuring business transactions to sustain/preserve the desired levels of control, use, ownership, and value of the (intangible) assets in both pre and post transaction contexts
  • how to achieve greater efficiencies and profitability when (intangible) asset stewardship, oversight and management are aligned with a company’s core mission, strategic planning, financial management, and the life – value – functionality cycle of the assets.

Absent consistent efforts to ensure each of the above occurs, boards and senior management may well be falling short of the fiduciary responsibilities articulated in Stone v Ritter, i.e., to know what’s going on inside their company!

Too, many experts suggest it is entirely conceivable that boards and senior managers could be held (personally) liable for risks that materialize and create adverse economic, competitive advantage, stakeholder effects, etc.

However, as boards and senior management integrate each of the above into their information demand regimen, it will elevate their confidence in knowing what information is relevant and demanding it be timely, sufficient, and accurate.

Whether, or to what extent business leaders accept, interpret, and execute on the implications of Stone v Ritter remains to be seen. What should not remain to be seen however is that today’s global business transaction environment is increasingly competitive, global, predatorial, winner-take-all, and attendant with both risks and  potentially very lucrative outcomes. 

Collectively, this obliges boards and senior managers to assume a more ‘hands and eyes on’ regimen regarding the stewardship, oversight, and management of company’s assets, particularly, intangible assets.

Intangible Asset Risk and Management Should Be Embedded In MBA Curriculum…

February 27th, 2012. Published under Analysis and commentary, Fiduciary Responsibility, Intangible asset strategy. No Comments.

Michael D.Moberly     February 27, 2012 

First, and foremost, the economic fact that today, 65+% of most company’s value, sources of revenue, growth and sustainability evolve directly from intangible assets which include intellectual property.

Second, conventional forms of characterizing IP ownership and enforcement, i.e., issuance of a patent, copyright, or trademark should no longer be assumed to constitute effective management of those assets, because they no longer serve as deterrents to – safe harbors from infringement, or that asset control, use, and ownership will not be contested.

Third, the issuance of a patent, copyright, and trademark are no longer consistent predictors of asset value or transaction success.

Fourth, the management, oversight, and stewardship of intangible assets have traditionally been conceived – portrayed as legal counsel and/or accounting processes apart from strategic business decisions.  These perspectives now need to be re-framed as fiduciary responsibilities emanating from c-suites and board rooms.

Fifth, the time frame when company’s can realize-extract the most value from their (intangible) assets has changed due in part to compression of asset’s life-value-functionality cycle. This is due in part to lower barriers to market entry/competition, rapid profits achieved from infringement and product counterfeiting operations that dilute legitimate global supply-distribution chains.

Sixth, the growing global universality of regulatory mandates regarding accounting and reporting intangible asset value, materiality, and performance, i.e., the international equivalents to the Sarbanes-Oxley Act and Financial Accounting Standards Board statements has created an absolute need to know.

Seventh, sustaining control, use, ownership, and value of knowledge-based (intangible) assets has become increasingly more challenging. When assets are compromised, economic and competitive advantage – market space hemorrhaging will commence rapidly, globally, and often irreversibly.

Eighth, increasingly sophisticated and global networks of data mining and business intelligence operations elevate asset risk and compromise by analyzing often times open source data to rapidly undermine – counter a company’s strategic planning, competitive advantages, and product launches, etc., at earlier stages.

Ninth, the management of intangible assets should focus on how to measure (asset) performance, which assets to measure, which assets include proprietary elements and competitive advantages, and the inter-connectedness of the assets.

Intangible Assets: Nine Facts Management Teams and Boards Absolutely Need To Know!

February 24th, 2012. Published under CFO's, Fiduciary Responsibility, Intangible asset strategy. 1 Comment.

 Michael D. Moberly   February 24, 2012

1.  It’s an economic fact that 65+% of most company’s value, sources of revenue, sustainability, and growth potential evolve directly from intangible assets, therefore its all-the-more likely intangible assets will be in play and integral to most deals and/or transactions.

2.  Conventional intellectual property protections issued, i.e., patents, copyrights, trademarks

             a. no longer constitute standalone (global) deterrents to or safe harbors from would be infringers, product counterfeiters, or misappropriation.

           b. lull asset holders/owners into assuming additional measures to sustain control, use, and monitor value of those assets are unnecessary

           c. no longer serve as consistent predictors of asset value, transaction success, or asset control and use will be uncontested.

3.  The value, competitive advantages, and efficiencies produced by intangible assets are often fragile, perishable, and non-renewable.  Once compromised, full asset recovery (value) is seldom achievable.

4.  The management, stewardship, and oversight of company’s intangible assets are often characterized as being the primary domain of legal counsel and accounting processes. Such conventional perspectives need to be re-framed as c-suite and board level fiduciary responsibilities.

5.  The time frame when company’s can realize the most value from theirintangibles relative to an assets respective life – value – functionality cycle continues to be compressed.  In part, that’s due to:

      a.  lower barriers to market entry

      b. rapid profits achieved through globally organized  asset misappropriation and infringement

      c.  product counterfeiting that routinely pollutes legitimate supply-distribution chains globally.

6.  The growing global universality of regulatory mandates for accounting and reporting the value, materiality, and financial performance of intangible assets, e.g., the international equivalents to the Sarbanes-Oxley Act and FASB statements has led to greater transparency but has created the unintended  consequence of open source vulnerability.

7.  Knowledge-based (intangible) assets are increasingly vulnerable to compromise and undermining.  Such risks have risen to the point decision makers should assume that once an asset has been compromised, economic and competitive advantage – market space hemorrhaging will commence immediately and globally.

8.  Many of the risks to intangible assets, i.e., theft – compromise, etc., are attributed to highly sophisticated and globally predatorial data mining, open source data analysis, competitive intelligence, and state sponsored economic/industrial espionage operations. Anyone of which can undermine – counter a company’s strategic planning, new product launches, competitive advantages, and/or entangle assets in costly, time consuming legal challenges that disrupt – stifle deal momentum etc., at increasingly earlier stages.

9.  Develop techniques/strategies for structuring business transactions to prevent, counter, and/or mitigate existing and emerging risks. They should extend beyond conventional (IT, IP) audits or business valuation checklists and be applicable to both pre and post (business) transaction contexts.

10.  Intangible asset measurement, i.e., performance, contributory value, materiality, etc.,  should be lessabout how to measure and more about:

     a.  determining what assets to measure

      b.  which assets carry proprietary elements and competitive advantages, and

      c.  the inter-connectedness of those assets.

While visiting  my blog, you are respectfully encouraged to browse other topics/subjects (left column, below photograph) .  Should you find particular topics of interest or relevant to your circumstance,  I would welcome your inquiry at  314-440-3593 or m.moberly@kpstrat.com

Managing Company Risk Today Requires Identifying Intangible Assets Embedded In Business Processes!

February 23rd, 2012. Published under Enterprise risk management.. No Comments.

Michael D. Moberly    February 23, 2012

The increasingly complex, intertwined, and challenging process of mitigating – managing company risk, requires us to include intangible assets in the risk management equation! Managing risk today must also include recognizing internal vulnerabilities that allow materialized risks, with increasing regularity, to cascade (ripple) throughout a company, thereby multiplying adverse effects and consequences.

On both counts, this is because 65+% of most company’s value, sources of revenue, sustainability, and growth potential today evolve directly from intangible assets. 

Mary Adams of I-Capital Advisors, appropriately points out that risk management needs to have a strong focus on business processes because that’s what knowledge-based (intangible asset intensive) companies do best, create and optimize their business processes. 

Too, says Robert Liscouski, an expert in risk identification and management of intangibles, there must be well coordinated processes that company’s put in place, to not merely engage risk but also to ensure the correct risks are being identified, monitored, and managed.  In Liscouski’s view, the correct risks are those which, if they materialize would produce the most adverse, costly, cascading, and long term effects to a company internally and externally.

But first, Liscouski says, not unlike Mary Adams, it’s essential for today’s risk managers to identify those business processes a company really needs to protect.  This begins by thoroughly understanding the linkages and relationships between each business process and the intangible assets embedded in that process

To achieve this company’s should clearly define their business processes so that each contributory intangible asset is distinguishable and its performance (value, materiality, etc.) is subject to being monitored for improvement – enhancement to ultimately provide a more comprehensive risk management environment.

Don’t Overlook Valuable Intangible Assets Security Products Deliver

February 20th, 2012. Published under Business Applications, Intangible Asset Value, Value Propositions. No Comments.

Michael D. Moberly     February 20, 2012

I am a firm believer that the introduction (presence) of security products, systems, and services in an environment produce – deliver intangible assets.  Security products and procedures are common to building-environment design and operation, e.g., access control, intrusion detection, and CCTV systems, etc.  Each produces sector-environment specific sets of intangible assets.  Seldom however do those intangibles get translated or leveraged as premiums or competitive advantages by the vendor, building designer, or security department.

In many instances, these ‘feel safe, feel good’ attributes manifest themselves as user expectations but are not incorporated in security ‘buy in’ presentations or return-on-security-investment (ROSI) equations because, as intangible assets, they’re frequently poorly understood and lack an effective narrative to describe their contributory value.

In today’s increasingly security conscious and (security) standards driven environment, those considering openly espousing (leveraging) the attributes of security systems and procedures should recognize:

  • legal counsel may caution such open/public displays because, by doing so, it may unduly  influence user expectations, thus when risks do materialize, a company may subject itself to elevated liability exposures.
  • intangibles lack physicality and thus are presumed to be too esoteric to promote as  competitive advantages to prospective clients and users as premiums.
  • intangible assets are routinely portrayed (reported) solely through accounting lens.
  • some security practitioners hold the belief that public announcements about the presence-use of security measures and/or systems undermine their deterrent factors and thus compromise the intended (designed) benefits.

While these perspectives are understandable and real, they’re also uniquely challenging to refute.  The result is, intangible attributes derived from security systems and products often go un-leveraged and ultimately dependent on individual user imagination to draw their own, albeit subjective ‘feel good, feel safe’ conclusions versus the value-added (risk management) premiums they are.

The economic fact that 65+% of most company’s value, sources of revenue, sustainability, and foundations for growth evolve directly from intangible assets casts these circumstances in a different light.

Traditionally the dominant sources of company value and revenue have flowed from tangible – physical assets, i.e., plants, real estate, equipment, and inventory, etc.  But, in today’s knowledge-based business (transaction) global economy the sources – origins of company value have shifted to intangible assets, i.e., intellectual property, proprietary know how, brand, reputation, image, and goodwill, etc.  (For a comprehensive list of intangible assets see http://kpstrat.com/brochure.) 

The phrase knowledge-based economy of course is a business-economic reality and certainly not merely a cliché relevant to only large firms.   For building designers, security product vendors, and certainly users, this phrase should serve as useful insight into how user’s ‘feel good, feel safe, and feel secure’ expectations have evolved.

In my view, architectural design, vendor competition, and security ‘buy in’ presentations must include effective articulation of the relevance and value add – contributory value of security products, services, and procedures in the form of intangibles such as competitive advantage premiums which can be prudently exploited.  Security and asset protection products of course, can deliver a broad spectrum of measurable client and user (intangible) benefits beyond conventional subjective risk-threat mitigation. 

Building-environment design and security measures (products, systems, etc.) can converge. For example in a security product (vendor) presentation I recently witnessed, it was clear the product had multiple potential selling points and numerous venues where it could be applied. Unfortunately however, the products’ inventor either did not recognize or chose not to address in his presentation at all, the various and attractive ‘security intangibles’ his product could deliver.

Had this security product inventor – vendor had a narrative to characterize and strategically bundle the multi-dimensional outcomes, i.e., security intangibles, his product could also deliver its quite possible client receptivity would have been substantially elevated because their return-on-investment projections would have been more clear and much broader.

Wikileak Phenomena…New Insider Dimensions To Corporate Reputation Risk!

February 16th, 2012. Published under Analysis and commentary, Insider Threats, Reputation risk.. 2 Comments.

Michael D. Moberly    February 16, 2012

I characterize the reactions by companies following last year’s ‘wikileaks’ phenomena, as adding more dimensions to mitigating the mounting inevitability that corporations will experience reputation risk.

 We witnessed those dimensions converge in a layered context to elevate the complexity of managing reputation risk, i.e.,

  1. the reactions – responses by PayPal, Visa, and Mastercard, and servers, etc.,
  2. the aggressive re-actions apparently perpetrated by ‘wikileak’ advocates-proponents in the form of denial of service attacks and various forms of hacking, etc.,
  3. the demeanor/behaviors exhibited by Julian Assange himself (aside from the outstanding criminal warrant awaiting him in Sweden) in terms of whether his (the wikileaks) website and his actions may come to be perceived publicly as that of a mere leaker, a quasi – citizen journalist, a self-styled technology era solicitor, or merely a middle man with an unwise agenda.
  4. announcements by Assanges’ legal counsel and other supporters of a ‘roll out’ of  a (presumed) defense strategy.
  5. the various efforts to deflect, mitigate, and counter the ‘leaks’ about U.S. and foreign government diplomatic (non-public) initiatives
  6.  the global ‘talking heads’ that consistently offered opinions through all forms of media
  7. global open source, transparency, and First Amendment advocates weighing in on the issues
  8. the respective positions of U.S. Departments of State and Defense portraying their reality that classified and embarrassing information has been leaked.
  9. U.S. Attorney General Holder’s public legal strategies presumably intended to deter future instances of leaks.
  10. growing anticipation of what additional, presumably sensitive and/or proprietary information is being held hostage, but presumably awaiting release by Assange that target specific companies.

Both collectively and individually, each of the above dimensions have prompted much warranted discussions in c-suites and board rooms globally, in addition to now necessary research focusing on the inevitability there are many more ‘PFC Mannings’ to come on both the government and the private sectors respectively.  It’s certainly a given, at least in my view, that many of the aforementioned discussions will likely include an array of recommendations for mounting and executing some form of ‘pre-emptive strike’ so to speak, i.e.,

  • screening ring client/customer lists to identify (assess, project) the potential for ‘wikileak’ types of problems to arise
  • severing associations with or creating some manner of probationary ‘watch list’ for customers-clients (stakeholders) that pose a particular ’wikileak’ type of hazard or show no evidence of executing practices (policies and procedures) that demonstrate they recognize its potential criticality
  • new oversight initiatives related to the selection, retention, and/or hosting and payment services to companies that engage in ‘wikileak’ types of acts that are contrary to existing law prescribed ethics.

It is certainly not a stretch, as I’m confident most, if not all of my colleagues would agree, that we will witness numerous companies that have already engaged in some variant of a ’pre-emptive’ strike as conveyed above.  Experience suggests, such pre-emptive strikes, if I can call them that, will most likely occur in the form of (private sector) policy changes intended to forestall as well as mitigate what may well be the initial salvo to try to counter this added dimension to, what has been up to this point, more conventional reputation risks.

Unfortunately though, what some companies may overlook or leave out of their ’reputation risk management equation’ is that engaging in ‘feel good’ pre-emptive strikes are generally irreversible.  That is, they ultimately do more strategic harm and present more reputational challenges than a poorly construed equation allows decision makers to recognize and consider.

The bottom line is, as most successful business decision makers understand, is that a company’s reputation, while being a generally valuable intangible asset, can be quite fragile.  Once compromised or attacked, unless the company’s reputation-goodwill bank is brimming full in advance, even partial economic – competitive advantage recovery will be a very costly and time consuming endeavor.

For some time, in both the private and government sectors, there have been significant initiatives underway to integrate information technologies to make relevant information accessible up and down a company’s supply chain and onto the battlefield using techniques which are often, in my view, much tweaked approaches to ‘knowledge management’.

The well intentioned premise of knowledge management, of course, and its 2012 variants, lies in the notion that more people (employees across functional-operational lines) need and should have access to certain information as a tool to aid various decision making processes, i.e., speed up the resolution of a problem, create efficiencies, etc.

In today’s global ‘information asset sharing business environment’, it should come as no surprise then that some PFC Manning’s of the future, may actually feel compelled to leak sensitive information or do so merely because they had the capability at their fingertips.  Engaging in downloading and/or copying of classified information however, and making it available to Wikileaks, which we must recognize is merely one of a growing number of ready and willing global outlets, which when confronted, may well lay claim to a (citizen) journalistic orientation that flows from their ‘first amendment’ rights.

Much research, personal experience, and countless anecdotes from colleagues leaves us with the very strong impression that there are literally thousands of PFC Manning’s who have the wherewithal and receptivity, if not a penchant, to become an ‘insider’.  An insider is a term which we in the information asset protection and security arena refer to as a conniving and feisty lot who consistently pose challenges to all sectors insofar as leaking sensitive information. 

Insiders come wrapped in many different motives which collectively form their sometimes distinctive rationale for doing what they do; steal, disseminate, and/or sell proprietary or classified information to those who have no legitimate (authorized) right to see, much less read that information and then knowingly disseminate it to entities that will make it available in an open source context.  In the private sector such acts may fall into categories of misappropriation or infringement.  In the government classified arena it’s likely to be called espionage!

When insiders are successful, as it appears PFC Manning was, not once, but perhaps multiple times, the product of their misdeed can, and often does wreak havoc with its target(s) which as we’ve already noted carries many new dimensions.  Those dimensions are especially critical in the increasingly inter-connected environment of business and government.

 Being reasonably well versed regarding ‘insider threats’ and some of the research which PFC Manning’s illegal behavior has spawned, again suggests he’s certainly not the proverbial ‘lone wolf’.

As for government victims, returning to a state of diplomatic normalcy following such a massive leak will be neither easy nor swift.  On the other hand, when such circumstances occur in the private sector, something which I’m more familiar, there are many financial, personal, and professional ‘fences that require mending’, some of which remain irreversibly broken which impacts a company’s bottom line very quickly.

What’s new and clear relative to the Manning – Assange incident is that there’s no precedent for the shear mass of data and information that was taken and disseminated aside from perhaps, the ‘Pentagon Papers’, a 1960’s event which few,  if any ‘mannings’ even know about let alone try to emulate. 

But that doesn’t discount, nor does it explain away the reality that many foresaw something of this nature and on this scale was inevitable!

The work of insiders, while it may not be the world’s oldest profession, it certainly does, in my view, rank in the top five.  And, to add insult to injury, stealth in this instance, was apparently merely a single PFC’s rouse of downloading ‘Lady Ga Ga’ music but, from a remote government computer with access to classified information.  I still have a hard time believing this was the act of a single PFC who acted alone.  I’m not suggesting this event should rise to the same level of debate whether Lee Harvey Oswald acted alone.

However one perceives the Manning’s of the world, in my view, it represents somewhat of a new breed of insider (threat, risk).  One that is more calculating, in some respects more stealthy, and whose acts can potentially cause more irreversible, costly, and immediate damage-harm and embarrassment to a company or organization than their predecessors who were largely confined or limited to stealing only ‘hard copies’ that they could put in the proverbial shoe box and carry out of a building under their overcoat.  Not unlike the former Detroit auto executive who literally put paper copies of ‘plans, intentions, and capabilities’ of his former employer to take to his new European automaker employer as somewhat of an arrogant, yet very strategic ’housewarming gift’.

Let me be clear though, this is not so much about the insider threat posed by the ’Wen Ho Lee’s who was originally charged, circumstantially at least, with compromising classified materials belonging to a U.S. national laboratory and giving them to an adversary.  The Manning event certainly has relevancy to the classified arena in terms of the types of assets now being targeted by an ever growing number of economic, competitive advantage, and military adversaries.  It is also a ‘wakeup call’ to the millions of small and mid-size companies that have developed unique and valuable sets of intangible assets that literally deliver (underlie) those company’s value, sources of revenue, competitive advantages, market position, and growth potential.

When an SME experiences a theft, misappropriation, or compromise by a trusted insider of one or more of its key revenue producing intangible assets, while the consequences are certainly not equivalent or comparable to national security breaches, their impact to that SME, in terms of lost revenue, undermined competitive advantages, lost market position, etc., can be, and often is, devastating and irreversible. 

So, as this construct, which I call ‘the new insider’ emerges, studies and research conducted by DoD’s Personnel Security Research Center and Carnegie Mellon University’s CERT unit provides important and timely credence and relevance.

A particular PERSEREC study appropriately titled ‘Technological, Social, and Economic Trends That Are Increasing U.S. Vulnerability to Insider Espionage’ was a significant factor in influencing how I am framing ’the new insider’ and the risks-threats they pose.  This particular study characterizes the ‘insider threat’ in a very compelling and rational global context.  It describes some very ominous challenges governments and corporations alike face, relative to trying to deter, prevent, combat, or mitigate, however one wishes to portray it, insider risks and threats. The four key one’s (described in this PERSEREC study) are conveyed below:

  1. Fewer employees today, and presumably in the future, are (will be) deterred by a conventional sense of employer loyalty.  In other words, they have a tendency (proclivity) to view theft of information assets to be morally justifiable if sharing those assets, they believe, will benefit the world community or prevent armed conflict…
  2. There is a greater inclination for employees who are – will be engaged in multinational trade-transactions to regard unauthorized transfer of information assets or technologies as a business matter, rather than an act of betrayal or treason…
  3. The value of – market for protected information assets, presumably regardless if it is a company’s proprietary information or trade secrets or a government agency’s classified information, has elevated as those so inclined, i.e., insiders, recognize it can be sold for a profit to an ever widening range of receptive global entities…
  4. Companies are at greater risk for experiencing insider theft of information assets than previously because there is no single countervailing trend to make it more difficult or less likely to occur…

So, designing effective practices-techniques to mitigate, counter, and ultimately defend against the insider threat, whether it be a ‘PFC Manning’ or far more technologically sophisticated and global players, should, above all, not be based solely on or unduly prejudiced by :

  • past events
  • anecdotal (internal, external) snap shots in time, or
  • generalized assumptions about one’s ethnic allegiance.

Rather, a company’s defenses to the insider threat should be well grounded in current and applied research and findings of highly specialized research as noted above.

Let it suffice to say, insider (threat, risk) challenges, left unchecked, or poorly addressed, can produce wide ranging and cascading affects that can instantaneously ripple throughout a company or government agency or department.  Let it be understood though, such risks-threats are unlikely to miraculously recede or fade away through attrition, terminations, or resignations.  Rather they require execution of practices that duly reflects the current, as well as future global business environment and can rapidly adjust to forward looking research.  But perhaps most importantly, it should not merely plug yesterday’s leaks!

Intangible Asset Resilience…

February 8th, 2012. Published under Book Review, Goodwill, Intangibles as strategic assets, Value Propositions. 1 Comment.

Michael D. Moberly   February 8, 2012

I recently re-read Ranjay Gulati’s book ‘Reorganize For Resilience: Putting Customers At The Center Of Your Business’.  It is not, in my judgment, just another of the myriad of books who’s author tweaks or critiques an existing standard or presents a highly nuanced alternative about the re-emerged importance of customer centricity.  

Instead, it’s a book about recognizing a company’s customer relationships are intangible assets which can produce ‘relationship capital’.  Gulati however, takes this important perspective several steps further.  He suggests that in order for customer relationships to be as effective and profitable as possible, there needs to be (a.) consistent engagement, and (b.) high level inquiry with customers.  These components, he adds, must collectively extend well beyond the often times siloed boundaries of a company’s products and/or services.

This important perspective prompts me to draw an analogy comparable to conducting intangible asset assessments for companies. A frequent revelation flowing from an assessment is that company management teams may not recognize or they may even be dismissive about the contributory value, competitive advantages, and efficiencies delivered by intangible assets that are routinely embedded in (their company’s) processes, practices, know how, and culture.

Intangible assets as we all know, and customer centricity I might add, lack a conventional sense of physicality.  As such, neither is reported on company balance sheets or financial statements. This notable absence from conventional forms of performance measurement contributes no doubt, to the tendency for both to be neglected, overlooked, and often conceived as distanced abstractions, rather than the ‘in your face’ realities they really are!

In response Gulati suggests, if customers’ real needs continue to be unrecognized and unmet, this may influence them (customers-clients) to commence ‘commoditizing’ that company’s products and services.  In other words, customers-clients may begin making (their) purchase decisions based primarily on price rather than having developed a personal connection to a particular company’s products and/or services.  

In a similar vein, management teams and boards that assume their company’s brand (another form of intangible asset) standing alone, will serve as the perpetual or proverbial life saver, is an assumption Gulati points out, that no longer reflects the realities of a globalized market place that is filled with competing options, products and services.  I would add to that, it’s a global marketplace that is aggressive, predatorial, and winner-take-all.

Thus, to compete more effectively, Gulati points out, companies must define themselves well beyond the characteristics of a single intangible asset, i.e., a brand, etc.  Thus, being first to identify and address customer – client ’problem spaces’ represents a powerful and strategic intangible asset, offensive weapon if you will, that can produce value, create sources of revenue, and serve as distinctive and long lasting foundations for growth.

 (Dr. Ranjay Gulati is a professor at the Harvard Business School with expertise in leadership, strategy, and organizational issues.  His book, Reorganize for Resilience: Putting Customers at the Center of Your Organization (Harvard Business Press, 2009)  explores how “resilient” companies—those that prosper both in good times and bad—drive growth and increase profitability by immersing themselves in the lives of their customers.)

Stone v Ritter Implications

February 7th, 2012. Published under Analysis and commentary, Fiduciary Responsibility, Intangibles as strategic assets. No Comments.

Michael D. Moberly   February 7, 2012

In Stone v. Ritter (but also, In Re Caremark and In Re Disney) the Delaware court drew, among other things, attention to board/director oversight (management, stewardship) of compliance programs and company assets.   In part, the court’s decision read…

 ’…ensuring the board is kept apprised of and receives accurate information in a timely manner that’s sufficient to allow it and senior management to reach informed judgments about the company’s business performance and compliance with the laws…’ 

More specifically, directors, officers (boards) now have a fiduciary responsibility to be kept apprised of and know what’s going on inside a company!

Yes, these are Delaware cases, and yes, they are 2006 and 1996 decisions respectively, but they present timely and relevant issues, which in my view, warrant the attention presented here, because they go to the very heart of the rising number of intangible-IP asset driven (knowledge-based) businesses.

Rebecca Walker suggests in her paper ’Board Oversight of a Compliance Program: The implications of Stone v. Ritter’ the decision will come to be viewed (applied) less for its focus on board oversight of compliance programs per se, and more for bringing clarity to what actually constitutes ‘board oversight’ of a company’s assets, and by extension, its intangible assets which of course includes intellectual property.

And, when 65+% of most company’s value, sources of revenue, and building blocks for growth and sustainability evolve directly from intangible assets, any declaration that this increasingly valuable asset class carries fiduciary responsibilities at a board level is certainly significant!

Meeting the spirit and intent of Stone v Ritter can be readily achieved by expanding the type, quality, and timeliness of information that boards (D&O’s) receive by:

  • scheduling presentations from relevant management team members for the purpose of:
    • determining how the company’s (internal, external) reporting processes – procedures are structured and if they reflect the requisites of ‘timeliness and sufficiency’…
    • assessing the company’s policies and practices relative to investigating suspected incidents of (internal, external) misconduct that could adversely impact a company’s business performance and compliance with relevant laws…
    • surveying the perceptions held by employees regarding a company’s reporting, compliance, and audit programs, and the sufficiency of employee training in these areas…
    • structuring the company’s reporting (compliance) programs to include adequate resources and authority for (their) effective execution.
  • examining how the company:
    • conducts risk assessments
    • prioritizes its risks, and
    • addresses (prevents, mitigates) those risks.

In addition, numerous legal experts suggest embedded in Stone v Ritter is a fairly strong advisory to boards and directors that there is a good faith duty, even perhaps a duty of loyalty, to ensure asset monitoring, reporting, and compliance mechanisms are not merely in place (on paper), but they’re fully operational.  That is, they are functioning in a manner to consistently apprise – provide boards and D&O’s…

  • with timely and accurate information, that is sufficient to allow them (within their respective scope) to
  • reach informed judgments concerning a company’s compliance with law, and business performance.

In other words, absent specific efforts (by boards and directors) to ensure each of the above occurs on a consistent basis, they may well be failing to satisfy their duty to be reasonably informed and could conceivably be held personally liable for risks that materialize and cause adverse  effects.

While acknowledging attempts to hold boards and directors (personally) liable for the misconduct of (company) employees for example, may be one of the more difficult aspects of corporation law for plaintiffs to prevail, it prompts some to consider if Stone and its implications will influence management teams, boards, and D&O’s to become more risk averse.

Whether or not one accepts the implications of Stone v Ritter as espoused here, what remains essential in today’s increasingly aggressive, competitive, predatorial, and ‘winner-take-all’ (global) business transaction environment, is that boards, directors, and management teams alike are obliged to assume a more ‘hands on’ state regarding the stewardship, oversight, and management of a company’s assets, particularly, its intangible assets.

Why?, because in cases such as Stone v. Ritter, In re Caremark, and In re Disney, important and necessary information failed to reach the board because of ineffective internal (company) controls and regular monitoring of those controls.  

Another underlying, but seldom commented on implication of Stone v Ritter in my view, is its relevance to enterprise risk management (ERM).  Simply defined, ERM encompasses doing what’s necessary, i.e., executing procedures, policies, and practices, to render a company ’proactively defensive’ to (business) risks.  If this particular implication is substantiated, which I suspect it will, company management teams and boards alike would be well-served to acquire much more than a mere familiarity with Stone v. Ritter, rather a forward looking operational understanding for its implications.

 All told, integral to – underlying each of the aforementioned fiduciary responsibilities is the absolute necessity that company’s put forth comparable efforts to sustain (protect, preserve) control, use, ownership, and monitor the value and materiality of its (intangible) assets.  If this does not occur, or fails, little else matters, because asset value will likely and quickly go to zero!

(This piece was inspired by Rebecca Walker’s paper  titled ’Board Oversight of a Compliance Program: The implications of Stone v. Ritter’ of Kaplan & Walker law firm.)

Intellectual Capital: Managing Your Company’s Ideas and Innovation

February 6th, 2012. Published under Analysis and commentary, Intellectual capital management.. No Comments.

Michael D. Moberly   February 6, 2012

Managing a company’s intellectual capital is certainly not new.  Numerous colleagues have long been respected thought leaders, strong advocates, and practitioners in this arena, i.e., Mary Adams, Michael Oleksak, Dr. Nir Kossovsky, Jonathan Low, and Dr. Ken Jarboe among others.                                          

Intellectual capital (IC) in straightforward terms includes ideas, innovation, know how, and skill sets, etc., that

  • are coupled with the understanding how to best use (exploit) those ideas, that knowledge and those skills
  • serve as the basis to achieve and solidify competitive advantages and/or be predicates for strategic alliances and other (business) transactions.

IC is routinely embedded in companies.  Unfortunately however, its importance and contributory value has not consistently translated to:

  • comprehensive recognition by management team and boards
  • ensuring procedures and practices are in place to identify, monitor, and extract value.

I characterize a company’s IC more as the aggregation of its knowhow and skill sets that have evolved or been acquired, somewhat akin to a (company) culture.  In that context, IC is an (intangible) asset that’s truly embedded in various processes and procedures used (by employees and management teams) to produce, develop new, as well as improve existing goods and/or services and create efficiencies, etc. 

In today’s increasingly knowledge-based businesses and economies in general, Adams and Oleksak, in their fine book ‘Intangible Capital’ quite correctly state a company possesses three forms of intangible capital, i.e.,

  • relationship
  • structural
  • intellectual

While each is interconnected in various ways, it is my view, the more significant underlier to a company’s competitive advantages, profitability, and sustainability is its intellectual capital!

It is essential though, that management teams and boards recognize IC is not something which is always permanently embedded within a company.  Rather, IC can be perishable and certainly vulnerable to a broad range of risks.  In other words, IC can best serve a company’s interests in my view only if the elements that actually deliver the value, revenue, and competitive advantages, etc., are distinguished and considered proprietary.

Necessarily then, at least initially, I advocate putting specific procedures/practices in place to signify and sustain the proprietary status of designated IC.  The intent of such measures is also to reduce the probability that designated IC will (purposefully, inadvertently, surreptitiously) enter the public domain and/or be acquired-replicated by a competitive adversary.  Should either of these, plus a myriad of circumstances occur, it would likely cause or at least hasten the IC’s value being diminished or its competitive advantages be undermined or lost altogether.

But, let’s be clear, IC is not synonymous with intellectual property, i.e., patents, trademarks, copyrights, etc.  IC is, to be sure, an intangible asset, like its intellectual property cousin.  Most forms of IC are not eligible for – cannot be converted to conventional intellectual property protection.  Thus, having processes and procedures in place to ensure IC’s proprietary status is sustained becomes all the more important.

Conducting periodic inventories and/or audits of intellectual property is certainly no substitute for, nor does it equate with what’s necessary for managing IC assets in today’s globally competitive, predatorial, and winner-take-all business (transaction) environments.  And, with steadily rising percentages of company value, revenue, growth potential, and sustainability tied directly to the production and effective use of intangible assets, of which IC is one, the notion of dedicating an individual and/or team to be responsible for identifying, managing, and protecting (a company’s) IC is becoming a prudent business decision with a strong and defensible value proposition!

(Those interested in learning more about intellectual capital management are encouraged to visit the IC Knowledge Center and read ‘Intangible Capital for Business Leaders’ authored by Mary Adams and Michael Oleksak.)